COMMISSIONER OF INCOME TAX, MADRAS vs. M/S. KHODAY ESWARSA & SONS

CIVIL APPEAL No. 648/1967Supreme Court[1972] 1 S.C.R. 84622 September 1971Bench: 2 JudgesAuthor: C.A. VAIDYIALINGAM, P. JAGANMOHAN REDDY COMMISSIONER OF8 pages
AI SummaryDismissed

What were the facts?

The assessee, a firm, was assessed for AY 1955-56. The Income-Tax Officer (ITO) added Rs. 77,518 (pharmaceuticals) and Rs. 9,900 (chemicals) to the returned income, inferring illicit sales of alcohol and unaccounted sales respectively, based on forged sale bills, fictitious purchasers, and a deficit of rectified spirit. The ITO then initiated penalty proceedings under Section 28(1)(c) for concealment of income. The Appellate Assistant Commissioner (AAC) confirmed the penalty, relying on a guess about surreptitious alcohol sales. The Income-Tax Appellate Tribunal (ITAT) set aside the penalty, holding that while additions might be justified in assessment, they did not prove deliberate concealment. The ITAT found no question of law arose. The High Court dismissed the Commissioner's application under Section 66(2) for reference, agreeing that the ITAT's findings were based on facts.

What did the Supreme Court hold?

The Supreme Court dismissed the appeal. It held that penalty proceedings are penal in character, requiring the Department to establish that the disputed amounts constitute income of the assessee. Beyond the falsity of any explanation, the Department must possess cogent material or evidence from which it can be inferred that the assessee consciously concealed particulars of its income or deliberately furnished inaccurate particulars. The original assessment proceedings, while evidence, are not conclusive for penalty. In this case, the Department relied solely on the reasons given in the original assessment order, lacking independent material to infer conscious concealment or deliberate inaccuracy. The ITAT's approach was correct and judicial, its conclusions were findings of fact, and thus no question of law arose for reference to the High Court. The High Court was justified in rejecting the application under Section 66(2).

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the penalty of Rs. 35,000 levied under Section 28(1)(c) of the Indian Income-tax Act, 1922? (Question of law or mixed law and fact, turning on Section 28(1)(c)). Assessee's contentions (implied by Tribunal's findings and High Court's dismissal): The additions made to the total income in the assessment proceedings, even if justified, do not automatically establish that the assessee deliberately concealed particulars of its income or furnished inaccurate particulars. The Department must provide independent material or evidence to prove conscious concealment or deliberate furnishing of inaccurate particulars, beyond the assessment order itself. Revenue's contentions (implied by appeal to High Court and Supreme Court): The reasons for adding the disputed amounts in the assessment proceedings were sufficient to warrant the levy of penalty under Section 28(1)(c). The Tribunal erred in cancelling the penalty, and a question of law arose regarding this cancellation.

Which sections of the Income-tax Act were involved?

Section 28(1)(c),Section 66(2)

AI-generated summary — verify with the full judgment below

846 COMMISSIONER OF INCpME 1AX, MADRAS ' V. MIS. KHODAY ESWA~A & SONS 'September '22, ·197'1 [C. A. VAID!ALINGA¥ AND P. !AGANMOHA\" RtooY~ JJ.] Income-tax ;J.ct (Il of 1922), s. 2B(-l.)(c)-Levy,of pe11alty-;--Ri!asons .in assesSment proceedings-Weight to' be, attached to. 1 1 In income-tax. proceedli1gs to_ the tax~ble 'income s.hown <'by the _respon- dent in its return two items amoitg-Oth~ \Ver& added ton .the .basis th_at there were illicit S'af~S of alcohol anQ that -cer.tain.- sales had not· been pro- perly ·accounted 'for:\ Jbereafter, the Income-t4x Officer, Special Investi- gation Circle, issued notice that ... he proposed 1to h;vy a penalty µnder s. 28(1)(r.) of the lnc'ome-tax Act, 1922, as ,the respondent bad conceal- ed particulars of its income and 'deliberately ~furni~l'led inaccurate parti-· culars.

He rejected the explanation of th~ ass:!ssee and levied a penalty.

In the order levying penalty the Incorne-tax Offi~er st:1ted that the reasoi1s - for adding_ the disputed amounts in the total income of the assessee had been already discussed in the original order 6f assessment and that there was no need to repeat them.

The AppelJate Assistant Commi

The order continues below.

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